Market structure refers to the characteristics of a market that determine the behavior of firms and the interaction between buyers and sellers. There are four main types of market structures: perfect competition, monopolistic competition, oligopoly, and monopoly.
Key Facts
- Perfect Competition:
- In a perfectly competitive market, there are many small firms that sell identical products.
- There is free entry and exit in the market, meaning new firms can easily enter and existing firms can exit.
- The market is characterized by a large number of buyers and sellers.
- Examples of industries that come close to perfect competition include stock markets, agricultural markets, and craft markets.
- Monopolistic Competition:
- Monopolistic competition is characterized by a large number of firms that sell similar but differentiated products.
- Each firm has some degree of market power due to product differentiation.
- Firms in monopolistic competition engage in marketing and advertising to differentiate their products.
- Examples of industries in monopolistic competition include fast food restaurants, clothing stores, and beauty salons.
- Oligopoly:
- Oligopoly is a market structure dominated by a few large firms.
- These firms can collaborate or compete with each other to control the market and influence prices.
- Entry into an oligopoly is difficult due to barriers such as control over resources and patents.
- Examples of oligopolies include the automobile industry and the video gaming console industry.
- Monopoly:
- A monopoly exists when there is a single firm that controls the entire market.
- The firm has complete market power and there are no close substitutes for its product.
- Monopolies can set prices and restrict output to maximize profits.
- Examples of monopolies include state-legislated liquor stores and certain companies that have been criticized for breaking antitrust laws.
Perfect Competition
In a perfectly competitive market, there are many small firms that sell identical products. There is free entry and exit in the market, meaning new firms can easily enter and existing firms can exit. The market is characterized by a large number of buyers and sellers.
Examples of industries that come close to perfect competition include stock markets, agricultural markets, and craft markets.
Monopolistic Competition
Monopolistic competition is characterized by a large number of firms that sell similar but differentiated products. Each firm has some degree of market power due to product differentiation. Firms in monopolistic competition engage in marketing and advertising to differentiate their products.
Examples of industries in monopolistic competition include fast food restaurants, clothing stores, and beauty salons.
Oligopoly
Oligopoly is a market structure dominated by a few large firms. These firms can collaborate or compete with each other to control the market and influence prices. Entry into an oligopoly is difficult due to barriers such as control over resources and patents.
Examples of oligopolies include the automobile industry and the video gaming console industry.
Monopoly
A monopoly exists when there is a single firm that controls the entire market. The firm has complete market power and there are no close substitutes for its product. Monopolies can set prices and restrict output to maximize profits.
Examples of monopolies include state-legislated liquor stores and certain companies that have been criticized for breaking antitrust laws.
Sources
- Corporate Finance Institute: Market Structure
- Wall Street Survivor: 4 Market Structures in Economics
- Aurora University: A Guide to Types of Market Structures
FAQs
What are the four main types of market structures?
Perfect competition, monopolistic competition, oligopoly, and monopoly.
What is perfect competition?
A market structure with many small firms selling identical products, free entry and exit, and a large number of buyers and sellers.
What is monopolistic competition?
A market structure with many firms selling similar but differentiated products, some degree of market power due to product differentiation, and marketing and advertising to differentiate products.
What is oligopoly?
A market structure dominated by a few large firms, with barriers to entry such as control over resources and patents.
What is monopoly?
A market structure with a single firm controlling the entire market, complete market power, and no close substitutes for its product.
What are some examples of perfect competition?
Stock markets, agricultural markets, and craft markets.
What are some examples of monopolistic competition?
Fast food restaurants, clothing stores, and beauty salons.
What are some examples of oligopoly?
Automobile industry and video gaming console industry.